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Core Money: Gold and Silver’s Value Universe

I personally own precious metals because it's the sensible thing to do. With the national debts of all modern nations, from Australia to Japan, the entire continent of Europe, Canada, and the granddaddy of all debtor nations, my native U.S. of A. ballooning into the tens of trillions, it's not even an option to have only fiat digits in your asset portfolio. Educate yourself on the all-important attributes of precious metals investments!

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Benjamin Graham was a renowned investor known for his in-depth analysis of value investing, which is still used as the foundation for modern investing today, though the craft has changed and evolved in dramatic fashion by now.

The Golden Apple: Duality of Profits

Understandably, many Americans have serious concerns regarding the sustainability of our free-market economy. With a catastrophic national debt load that reached $16 trillion this year and a major paradigm-shifting demographic event on the horizon, a record number of people have turned to the relative safety of gold and other precious metals. After all, one of the key selling points of physical gold bullion is that “gold is what it is.” There are no counter-party risks associated with bullion, meaning there are no financial contracts or claims against it, nor do the actions of a separate party affect the performance or value of gold. In a financial world rife with toxic derivatives, an investment vehicle outside of this debt-based paradigm is a much needed safeguard. However, gold’s list of advantages, as with any financial instrument, can quickly turn sour and focusing merely on the yellow metal can lose an investor major profits with other key opportunities.

Let’s start off with a 25-year price chart of a “mystery” asset:

Some of you are probably thinking that this mystery asset is gold, the subject of our article. After all, since 1980, the precious metals have been in a bear market until around 2001, when gold and silver started to rise year over year until the crisis of 2008 took everything down. However, that only proved to be a buying opportunity as prices continued to trend skywards until a record shattering summer of 2011, when gold hit $1,900.

While all of the above is true, the chart represents not gold, but Apple.

Why bring up a discussion on Apple when the focus is on the safe-haven asset of gold? After all, its shares took a tumble over the past few weeks, and seemingly, every indicator suggests that this is one to dump.

To illustrate, let’s bring up the technicals for AAPL:

The last 6 weeks of AAPL’s trading sessions look like a technical analyst’s worst nightmare, with the Relative Strength Indicator (RSI) registering an oversold reading, at 29.51, and the MAC-D confirming downward momentum in the share price. Further confirmation of bearishness is reflected in the ADX indicator, or Average Directional Index. The ADX line hit 44.53 on Friday’s close, and considering that the bearish “-DI” had already crossed above the “+DI,” this set of technical parameters would register as a “strong sell” in many a technicians’ algorithms.

Whatever the specific causation factors for this recent breakdown, we all, on a basic, perhaps instinctive basis, know that the fundamentals for Apple are strong. People love their products, gravitate towards their advertising, and an entire tech-culture is engrained within and throughout their company. Notwithstanding acts of God or complete lunacy, Apple is a company that is here to stay for a very, very long time and that gives long term investors confidence in their prospects.

Similar or identical arguments are given for gold to explain away its moments of volatility. The long-term trend is up, up, and away! Central banks will continue to print money and thereby provide a baseline of support for higher prices. Gold has been used as stores of wealth for 5,000 years of human history and won’t go away any time soon.

And surely, the long-term technicals bare this out:

Using the ADX indicator, I have plotted green and red vertical lines across the chart to represent when a “buy” or “sell” signal is registered when parameters are appropriately aligned. If an investor bought or sold gold when the ADX first registers a signal, he or she would have done quite well. But for the bullish investor, the underlying theme is the long-term trend, which, despite the volatility, has been moving upward in a strong, consistent manner. It’s also the same confidence that inspires people to stay in gold despite a recent correction of this year’s August rally.

However, people who merely stay in gold (or silver) and never diversify outside of the physical bullion realm are missing out on alternative opportunities.

Let’s take a look at AAPL’s 3-year chart, for an eye-opening comparison:

Remarkable how similar these two assets look, isn’t it?

For one thing, you have a near-identical long-term trend that is more consistent and less volatile than gold’s. Again, using the ADX indicator, 4 buy signals were registered for AAPL in the last 3 years, just like gold. The difference here is that a sell-signal was never given until only recently. And even with that signal, it can be argued that from a technical standpoint, this downward move was necessary to consolidate the wild gains Apple made for much of this year. Consolidation of Gold, amongst goldbugs, is vehemently (and sometimes violently) referred to as a buying opportunity caused by “The Cartel.” They follow the belief that the fundamentals are supportive of higher prices despite the short-term noise. Well, this author argues that the same can be said for Apple, where a massive sell-off provides great entry points for ownership shares of a fundamentally strong company.

Ultimately, in a fiscal environment where digital money printing seems to be the only workable solution for this economic malaise, physical gold bullion surely has its place and a lofty one at that. After all, one cannot argue against gold’s intrinsic value, a value that indeed has withstood the test of time, culture, and change. However, there are significant downsides to gold. It is volatile, it is cumbersome, and perhaps most significantly, it is a value-based, not utility-based commodity. The days when gold was treated as real money are over and will likely never return. Whether we agree or not, it is traded as a commodity, and will therefore be subject to the whims of a bull market AND a bear market. The smart investor eventually realizes that a diversity of options is the only effective way to navigate today’s financial paradigm.

Core Money: Gold and Silver’s Value Universe

I personally own precious metals because it's the sensible thing to do. With the national debts of all modern nations, from Australia to Japan, the entire continent of Europe, Canada, and the granddaddy of all debtor nations, my native U.S. of A. ballooning into the tens of trillions, it's not even an option to have only fiat digits in your asset portfolio. Educate yourself on the all-important attributes of precious metals investments!